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Ireland targets inflation in bid to join ‘currency club’

A member of the EU’s ‘poor four’ club of member states for so long, it wears its EMU contender status like a badge – and one which it will not surrender without a fight.

But turbulence on the currency markets in recent weeks has cast doubt, not only on Ireland’s ability to qualify for monetary union but also on the wisdom of its joining without the UK.

Ever since UK Finance Minister Kenneth Clarke raised interest rates at the end of last month, causing the value of sterling to surge, the Irish punt has been hovering around an 18-month low against the British pound.

Because Ireland’s economy is so open to foreign trade, that has raised the spectre of inflation imported from the UK.

Despite reasonably successful efforts over the past two years to diversify trade, the bulk of Ireland’s consumer goods still come from Britain and any rise in the price of those products would inevitably feed through to domestic inflation.

Although that averaged just below 2.5% in 1994 and 1995, and is forecast to fall below 2% this year, economists are warning that Ireland may yet stumble at the EMU inflation fence.

Under Maastricht Treaty rules, a country’s inflation must be no more than 1.5 percentage points above the average of the lowest three rates in the EU to qualify for monetary union.

According to Jim O’Leary, chief economist at Davy Stockbrokers, that target might just move out of Ireland’s reach unless urgent steps are taken to curb prices increases.

The central bank has been trying desperately to prop up the punt since the beginning of this month but, caught between the devil and the deep blue sea, it has largely failed. Any attempt to drag the punt up against sterling also raises rates against the deutschemark, which are already considered too high for comfort.

Even if the bank manages to keep a lid on Irish inflation next year, sterling’s recent rise has also thrown into sharp focus the likely perils of Ireland joining the euro without the UK.

Like it or not, the punt is a sterling clone and the Irish economy is tied to that of its former colonial master.

The Economic and Social Research Institute concluded in a report recently that, links with the UK notwithstanding, Ireland would benefit marginally from monetary union.

But that is being questioned by Irish economists who fear that a devaluation of sterling after the punt is pegged to the euro could damage Ireland’s competitive position and leave its central bank powerless to intervene.